Defending your organisation against fraud and corruption. mario samuel camacho compressed

MARIO SAMUEL CAMACHO 2017
The case of Odebrecht

DEFENDINGYOUR ORGANISATION
AGAINSTFRAUD AND CORRUPTION
2018

LIST OF CONTENT
1. SUMMARY 6
PART ONE
2. WHY DO FRAUD AND CORRUPTION TOOK PLACE
FROM THE PERSPECTIVE OF THE PERPETRATOR?
9
3. FRAUD AND CORRUPTION ANALYSIS 13
3.1. WHAT FAILINGS TOOK PLACE TO ALLOW THE FRAUD
AND CORRUPTION TO HAPPEN?
13
3.2. WHY OFTEN PEOPLE FALL SHORT TO SEE AND
PREVENT FRAUD?
15
4. HOW COULD ODEBRECHT HAS DEFENDED ITSELF
AGAINST FRAUD AND CORRUPTION?
17
PART TWO
5. REFLECTIONS 20
5.1. WHAT THREE SPECIFIC ASPECTS OF LEARNING WILL
YOU TAKE BACK TO YOUR OWN ORGANISATION?
20
5.2. WHAT DO YOU INTEND TO DO WITH THIS
LEARNING?
21
DEFENDING YOUR ORGANISATION AGAINST FRAUD AND CORRUPTION 3

5.3. WHAT BARRIERS DO YOU THINK YOU WILL
EXPERIENCE AND HOW COULD YOU OVERCOME THEM?
21
PART THREE
6. CONCLUSIONS 23
7. REFERENCES 24
8. APPENDICES 28

LIST OF FIGURES
FIGURE 1. The Fraud Triangle 10
FIGURE 2. The Fraud Diamond 12

The present report develops the case of the
Brazilian company, Odebrecht, which has
been implicated in cases of fraud and
corruption throughout Latin America.
Briefly, to explain the background of
Odebrecht, it is a “global organization of
Brazilian origin, with an ongoing
commitment to satisfying its clients,
generating value for its shareholders,
developing the communities [...] and
helping its members to fulfill their potential”
(Odebrecht, 2014).
Lately, Odebrecht was caught in “Operacao
Lava Jato” for bribing politicians, including
presidents and ex-presidents, to obtain
profitable contracts (Gallas, 2017).
In this sense, the first part of the report
explains the relevant theories to understand
and analyse fraud and corruption, revising
fundamental theories such as the Fraud
Triangle and the Fraud Diamond to deepen
in the causes of fraud, its consequences,
SUMMARY1

the human failures and how to prevent it.
Following this, the second part of the report
has a reflective nature, in which, is intended
to reflect on the learning gained and how
this knowledge will be utilised in practical
terms.
Finally, the goal of this report is showing
how fraud and corruption could be
prevented, so these strategies may be
replicated in other organisations.

“People in almost every society value honesty
and maintain high beliefs about their own
morality; yet examples of significant dishonesty
can be found everywhere in the marketplace”
(Mazar et al, 2008: 642).
Odebrecht focused on expanding its
business in South America and even,
Africa; however, this ambition turned into
greed and it was recognised the need to do
whatever it takes to expand the business
as much as possible, “involving $800
million in payoffs in exchange for lucrative
contracts”, disregarding morality (Casey
and Zarate, 2017).
In essence, Odebrecht was paying bribes,
which is considered by Bauhr and
Nasiritousi (2011) as greed corruption
since it involves gaining advantages over
competitors (Zimbelman, 1997, as cited in
Rodgers et al, 2015: 871).
Why do the fraud and corruption
took place from the perspective
of the perpetrator?2

But, in business education, people are
taught to compete in a culture of “self
interest above broader values of
community and corporate citizenship”
(Swanson and Frederick, 2005: 24).
Therefore, the idea of making enormous
profits no matter what, is comprised in the
business educational model and strengthen
in the organisational practices.
For example, Siemens was also guilty for
paying “$1.4 billion in bribes to land
government contracts on four continents”
(Vardi, 2010). So, it is a similar case of
ambition turned into greed, and later, into
a scandal.
Nevertheless, even if this may be the most
notorious explanation, it is incomplete
because fraud and corruption is a complex
phenomenon, which, can potentially occur
everywhere.
Thus, to further explain fraud and corruption from the viewpoint of the fraudster, it will be
shown the Fraud Triangle in Figure 1.
FIGURE 1. The Fraud Triangle (Cressey, 1953)
Cressey (1973, as cited in McMahon et al, 2016: 16) discovered in the Fraud Triangle that
the “motivation for crime” comprised three incentives: motivation, opportunity and
rationalisation.
Pressure or motivation
It is the cause or pressure behind the transgression or simply, what motivate individuals to

perpetrate fraud (Murphy and Free, 2016).
In practical terms, Odebrecht had a significant pressure to make more profits and lead the
construction industry in Latin America.
Thus, the motivation was the growth of the firm and increasing revenues, that is why
Odebrecht paid bribes to obtain contracts (BBC, 2017).
To further illustrate this point, a famous company like Daimler paid around “$56m in bribes
over more than a decade covering more than 200 transactions in at least 22 countries” to
make extraordinary profits (Simon, 2010).
So, Odebrecht is not alone in this matter as motivation can be increasing revenues or
being the leading company in its sector.
Opportunity
Secondly, opportunity refers to the possibility of violating trust in a circumstance that allows
the occurrence of the fraud (Dorminey et al, 2012).
In this regard, it is noteworthy that Odebrecht was under the influence of weak controls in
the countries, where it was operating.
As an illustration, Odebrecht had subsidiaries in countries where corruption is perceived as
high.
For instance, according to Transparency International (2017) countries such as Venezuela
or Mexico are ranked 166/176 and 123/176, respectively, so bribery was likely to occur
and the firm benefited from this likelihood.
However, fraud and corruption are not exclusive of developing countries, indeed, “crime
and corruption are ubiquitous worldwide” (Ruohan, 2016: 253).
To exemplify this fact, in South Korea, Samsung was involved in a bribery case related to
politicians too, in which, Samsung vice chairman provided the South Korean President
around £30.4m in exchange for government support of his management succession when
he had the opportunity to commit fraud (Kim and Kong, 2017).
Rationalisation
It is the psychological strategy to justify fraud “without suffering psychological pain” and
typically, fraudsters validate their behaviours by telling themselves that everybody is doing
it (Ramamoorti and Epstein, 2016: 7).
So, this is a typical mechanism to alleviate guilt through rationalisation (Zyglidopoulos et
al, 2009). In the case of Odebrecht, it was said that everybody offer brides to government
officials to gain contracts and it will never stop because “it was something normal in how
all those political parties functioned” (Smith et al, 2017a).
As has been noted, the Fraud Triangle provides a deeper analysis of fraud and corruption.
Although, the Fraud Triangle of Cressey has limitations since it cannot identify all aspects

of fraud and corruption (McMahon et al, 2016).
As a result, scholars like Hermanson (2004, as cited in McMahon et al, 2016) state that
capability should be added to the triangle to form the Fraud Diamond.
FIGURE 2. The Fraud Diamond (Wolfe and Hermanson, 2004)
In the Fraud Diamond analysis, it is added an additional aspect, which is capability.
Capability is referred to personal characteristic or abilities to commit fraud (Dorminey et al,
2012) like intelligence, power or charisma.
In effect, Odebrecht senior managers and CEO had the capability “to over-rule or ignore
valuable internal controls” (McMahon et al, 2016: 17) as they created the “Division of
Structured Operations”, which, “effectively functioned as a stand-alone bribe department”
(The Economist, 2016).
Considering this, it was a common scheme, in which, bribes are politely called “marketing
commissions” (Iyer and Morino, 2012: 1), but, in the end, this department was created due
to the capability or power of the leaders of Odebrecht.
In sum, greed was the main catalyst of fraud and corruption for Odebrecht and the Fraud
Triangle and Fraud Diamond offered a deeper analysis as they consider four aspects to
discuss: motivation, opportunity, rationalisation and capacity.

"It has been argued that moral failures,
such as greed precede and partly cause a
financial crisis" (Weitzner & Darroch, 2009, as cited in Árnason, 2010:
103).
This section highlights the particular human or organisational failures regarding control and
later, it is discussed why often organisations do not prevent, recognise and cope with fraud
and corruption.
3.1. WHAT FAILINGS TOOK PLACE TO ‘ALLOW’ THE FRAUD
AND CORRUPTION TO HAPPEN?
In detail, since 1994, Odebrecht “has long
been accused of winning business in an
old-fashioned and less admirable way” by
being the main donor to political-consulting
firms, being accused of bribery several
times, having meetings with politicians
and overpayment for the work they did
(The Economist, 2015).
Fraud and corruption analysis3

In consequence, various warning signals
were omitted and this fraud culture was
allowed to grow.
Decades later, it can be said that the history
of an organisation regarding its
transgressions, may be a “predictor of
future wrongdoings” because “repeated
offences by an organization suggest the
existence of norms or a culture within the
organization that condones or even
encourages such behavior” (Baucus and
Near, 1991, as cited in Daboub et al, 1995:
146).
Specifically, to deepen the analysis, some
of the detected wrongdoings of Odebrecht
are presented as follows:
Firstly, the most basic traditional
approaches to prevent fraud and corruption
like external auditing or integrity training
were not taken into account as the firm had
no control from external sources, especially,
independent auditors in order to hide
transactions (Casey and Zarate, 2017).
To clarify this point, it is interesting to
mention the case of Toshiba, which, was
caught reporting a false rise in benefits and
it was only detected by external auditors
later (Inagaki, 2017).
Simultaneously, integrity risks should have
been determined to evaluate the
possibilities to commit fraud in every
position of the organisation, because it is
necessary to have preventive control
strategies over all positions, particularly, in
the managerial field (Iyer et al, 2009).
Actually, executives of Odebrecht helped
“the company secure contracts to build
dams, power plants, airports, and refineries
across Latin America”, but they did it by
“creating fake engineering, construction,
and consulting companies that used secret
bank accounts to pay fake invoices
submitted by fake customers” (Smith et al,
2017b).
Thus, it is essential to control the financial
management and practices of executives
to reduce fraud and corruption, or at least,
to avoid the transgressions to escalate to
a scandal.
Another failure that allowed fraud and
corruption to happen, according to Iyer et
al (2009) was the traditional risk
management that deals poorly with the
dark side of human behaviour.
Thus, it was required to apply a more
“human approach [...] to deal with fraud”
like, for example, brainstorming
techniques thinking like a thief (Iyer et al,
2009: 16-17) or just active integrity
programmes, disciplining transgressors
from the beginning.
Furthermore, it was remarkable the
necessity to implement mechanisms to
identify unconventional personalities and
prevent them to reach positions of
influence because they would be tempted
to commit fraud (Ramamoorti and
Epstein, 2016).
In other words, it should be pertinent to
examine personal integrity, which, is
assessed from past behaviours decisions
and stories, etc; in interviews (Dorminey
et al, 2012).
In history, there were companies, in
which, the staff in the top of the hierarchy
used their influence to commit fraud, as
an example, the CEO and CFO of Tyco
were known as very ambitious workers,
but their true ambitions were not detected
and they utilised their power to purchased
“extravagant items” and properties with
the funds of Tyco (Pillmore, 2013).
Ultimately, other evident warning signals
were dismissed like financing presidential
campaigns in several countries of Latin
America, and when top executives have
close social relationships with
governments, their companies are usually

inclined to engage in fraud and corruption
(Collins et al, 2009).
Incidentally, being unusually close to
customers is one of the biggest red flags in
fraud and corruption (Sheridan, 2014).
In summary, there were several human
failures that could have been prevented in
Odebrecht, such as: stopping Odebrecht
association with politicians, not
implementing fraud and corruption
policies after the first transgression, the
lack of independent auditors, not applying
preventive controls strategies over all
positions (especially senior managers),
among others.
As noted above, organisations have several shortcomings in the prevention of fraud and
corruption, and the cultural business environment, in which, “ethics is not a requirement
but a moral option” fosters fraud and corruption even more (Swanson and Frederick, 2005:
25-26).
Considering this, it will be shown the most notorious factors, which, prevent organisations
to recognise and deal with fraud and corruption.
3.2. WHY OFTEN PEOPLE FALL SHORT TO SEE AND PREVENT
FRAUD?
Initially, as ethic is not a requirement in
business and the financial system
promotes strong competitiveness,
competition in the workplace may mean
that “if one individual refuses to perform an
illegal act, he may simply be replaced by
someone else who is” (Heath, 2008: 606).
So, strong competition between
organisations pressure managers and
“generate the perception, among many
people, that they have no choice but to
violate the law” (Heath, 2008: 605).
As a consequence, when employees and
managers are following this logic, they can
forget basic ethic principles and act
differently as they normally behave
(Kowalski & Vaught, 2009).
In addition, the “moral muteness” of
managers have also been a way of
facilitating fraud and corruption and
perpetuating a very narrow understanding
of morality (Bird and Waters, 1989: 81),
and it is normal to note that there is no
congruence between moral actions and
the organisational speech (Bird and
Waters, 1989: 74).
Besides, code of conducts are omitted or
they only reflect what the organisation
aspires to be and not what it really is (Iyer
and Minogue, 2009).
Closely related to the previous factors, the
difficulty to recognise fraud and corruption
in organisations is also explained by
group-thinking.
Group-thinking is the “tendency of the
members of a group to seek and maintain
harmony, at the cost of ignoring or
avoiding important decisions” (Clegg et al,
2011: 99).
Thus, it means that stakeholders of
Odebrecht were not prepared to break the
status quo in order to keep harmony, even
if decisions were known to have negative
consequences.

To illustrate this point, Enron was a good
example of organisational group-thinking
as well since “Enron's culture [...] kept
individual employees from exposing the
executive wrongdoers” and the
organisational culture was eroded little by
little, by the trespassing of ethical
boundaries, allowing more and more
questionable behaviour to slip through the
cracks” (Sims and Brinkmann, 2003: 252).
To further analyse shortcomings of
organisations to prevent fraud and
corruption, it is noteworthy the lack of
whistle-blowing procedures in the majority
of firms, and in spite of the controversial
nature of whistle-blowing, it should be
enhanced, not disapproved (Taiwo, 2015).
To remark the importance of whistle-
blowing, Webb (2010) affirms that a
company like BP could have saved billions
of pounds and an environmental disaster in
the Gulf of Mexico if they had listened to
the internal whistle-blowers warning the
risks of an oil leak.
Similarly, it has been suggested that the
tendency to commit fraud is diminished
when it is given reminders of ethical
standards or moral reminders (Ariely,
2012).
In effect, this strategy creates an
atmosphere that lessens the chance of
unethical behaviour in organisations (Grym
and Liljander, 2016), nevertheless, its
influence only works in the moment,
“without longer-lasting effects” (Bott et al,
2017).
In short, even when an organisation
behaves deliberately unethically, it is
important to decrease the factors that
foster fraud and corruption because, in the
end, the organisational reputation would
be harmed and its profitability reduced
(Gilby, 2014).
The first warning signal should be
attended as soon as possible and whistle-
blowers should be listened before the
fraud scheme escalates to a higher level,
in which, it is harder to eradicate.

“The top priority for a firm’s management
team should be preventing fraud from
occurring rather than reacting to it after
fraud has been detected” (Giles, 2012, as cited in McMahon et
al, 2016: 18).
As remarked by Iyer et al (2009), fraud and
corruption are hard to spot since the
likelihood of occurrence is not measurable
and it depends on the willingness of
subjects.
Although, to assess the likelihood of
occurrence of fraud, it is suggested to
evaluate each position of the organisation
and consider the possibilities of the
individual to commit fraud if the individual
were dishonest (Iyer et al, 2009).
Therefore, evaluating the probability of
committing fraud in every position would
improve the organisation prevention
against fraud and corruption.
Additionally, clear internal whistle-blowing
policies and procedures would have
How could Odebrecht have defended
itself against fraud and corruption?
4

avoided the external disclosure of
information, which, affected the reputation
and future actions of the organisation
(Keenan and McClain, 1992, as cited in
MacGregor and Stuebs, 2014).
Therefore, whistle-blowing should be
promoted under certain conditions as “half
of the individuals aware of wrongdoing
choose to remain silent”, allowing potential
damage to the organisation (Fredin, 2012,
as cited in MacGregor and Stuebs, 2014:
149).
Equally important, external audits are
fundamental for the corporate governance
and they are necessary to prevent fraud
and corruption as internal audit
departments can be under the influence
of corrupt managers (Huajing et al, 2017).
As a matter of fact, external auditing
provides objectivity and reduce the risks
of creative accounting (Huajing et al,
2017).
In conclusion, the possibility to question
the wrongdoings without “fear of reprisals”
(Sheridan, 2014: 234) promotes the
prevention of fraud and corruption, and
Odebrecht, needs to offer means for
anonymous whistle-blowers to express
and avoid further reputational damage.

In this section, it is discussed what the readings and discussions about fraud and
corruption represented to my academic and professional life.
Particularly, it reflects on the knowledge gained and how it can be applied to prevent and
solve cases of fraud and corruption.
5.1. WHAT THREE SPECIFIC ASPECTS OF LEARNING WILL
YOU TAKE BACK TO YOUR OWN ORGANISATION?
In order to reflect back on the learning gained and deepen in the practical application of
this learning, it is presented the three main aspects, which, may be applied in the
organisation I work for.
► Detecting warning signals of fraud and corruption. Now, after several discussions
and reflections about detecting warning signals of fraud and corruption, it would be easier
to spot those cases in everyday life.
For instance, in my workplace, I can now detect cases of overpaid consultants and
Reflections5

unusual relationships with customers and even, politicians.
► Code of ethics and auditing are not enough. The code of ethics and auditing can be
evaded and altered easily.
In effect, code of ethics should be constantly reminded and reinforced in managers and
employees to diminish transgressions to the rules (Statler and Oliver, 2016) and regarding
auditing, it has been realised that internal auditing is not sufficient and it should be
complemented with external audits (Zain et al, 2015), which, are not currently done in my
organisation.
► Ethics and moral reminders are effective for reducing fraud and corruption.
“Organisations face innumerable integrity risks, at every level and division, affecting every
asset, person and objective” (Iyer et al, 2009: 16).
So, the simple fact of constantly reminding employees and managers the moral standards
of society can reduce fraud and corruption. In fact, it is now utilised in various spheres of
business and it can be more effective than training in morals (Ariely, 2012).
Therefore, it would be useful in the organisation I work for, especially, in critical
departments like human resources.
5.2. WHAT DO YOU INTEND TO DO WITH THIS LEARNING?
First of all, the ability to detect and provide recommendations in fraud and corruption
taught me new tools to apply in organisational environments.
Thus, it is expected to assist the managerial staff detecting suspicious events related to
fraud and corruption and create whistle-blowing procedures for my organisation as there
are no policies for whistle-blowing.
Moreover, it also opens a new possible route in my career, it has increased my potential to
be part of another department or continue developing my career in other organisational
activities, and finally, this learning is also useful to prevent fraud in my personal life and
businesses.
5.3. WHAT BARRIERS DO YOU THINK YOU WILL EXPERIENCE
AND HOW COULD YOU OVERCOME THEM?
Now, with the awareness that fraud and corruption happen everywhere and it is potentially
present in all organisations, I consider that group-thinking and permissive organisational
and national cultures regarding fraud and corruption will be the biggest obstacles to
surpass.
Now, to face those cultural barriers, Freemantle (2013) affirms that the Johnson’s cultural
web model can be applied almost to every cultural barrier in order to install new beliefs.

Thus, by changing rituals, routines, stories, symbols, etc; it would be possible to insert new
beliefs and proposals like whistle-blowing procedures, moral reminders or external audits.
As an illustration, changing some cultural facts in the organisation I work for, it would be
possible to promote anonymous ways to expose fraud and corruption as an internal
mechanism because whistle-blowers who employ external channels are more likely to
suffer retaliation since their actions are “interpreted as a threat to the organization's
structure and legitimate authority” (Miceli and Near, 2002, as cited in Mesmer-Magnus and
Viswesvaran, 2005: 293).

In conclusion, the report discussed the application of the main classical theories on fraud
and corruption to the case of Odebrecht, analysing the causes of the fraud, how to detect
and prevent these fraudulent practices.
Specifically, part one offered an explanation to the fraud and corruption case from the point
of view of Odebrecht, identifying the human and organisational flaws that allowed fraud to
occur.
Then, it was examined the methods to recognise, prevent, cope and defend organisations
from fraud and corruption.
On the other hand, in part two, it was considered, in a reflective manner, the prospective
utilisation of the learning obtained in the professional and personal sphere, also reflecting
on the barriers to overcome to successfully prevent fraud and corruption. In a few words,
“fraud is always obvious to the fraudster’s colleagues after the event […] However, the
mistake is always the same – fraud was never considered a possibility (Chartered Institute
of Management Accountants, 2008: 37).
Therefore, prevention and detection of warning signals is the first action to take to stop
fraud and corruption.
CONCLUSIONS6

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APPENDIX A. Value of bribes received, by country, $m.
Source: The Economist, 2016
APPENDICES8

APPENDIX B. Corruption perceptions Index 2016.
Source: Transparency international, 2017

Mario Samuel Camacho
Sociologist
MSc. in Business & Management
camacho16@gmail.com

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